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March 15, 2013

The Worst Article I've Read in Awhile...

Last weekend, I read an article on Business Insider by Henry Blodget piggybacking a Paul Krugman article on how cutting government spending is bad for economic growth.  Both articles apparently rely on the above chart comparing US and UK GDP over the past five years.  The article somehow insinuates that the UK is under performing the US economy because of the UK's cuts in government spending.

This is absurd and here is why.

The Composition of GDP in both countries

In the US and UK, roughly 70 percent of the economy is based on factors other than government spending.  These include, but are not limited to consumer spending, capital investment, and trade.  Not acknowledging any of these factors in doing a comparison between the two countries is simply ignorant.

What if the UK consumer is less confident and spending less than the US consumer?

What about trade?  We'll bring this up again in the section below.

The Impact of Europe

Let's not forget the impact of Europe's financial crisis in the United Kingdom.  Even the liberal Guardian UK newspaper gets it.

The main issues facing the UK economy were the impact of rising prices on real incomes, "the confidence shock" from the eurozone, and a greater impact from the financial crisis on output than previously thought. 

All three of those factors have nothing to do with austerity in the UK.  In fact, it could be argued that government spending in Greece, Spain, and Italy are more responsible for the UK's economic woes than the UK's domestic government spending (but we won't point that out).  Furthermore, if inflation is a problem, more government spending would only make the situation worse.

Could QE Have Something to Do With It?

Finally, we want to look at both countries' economies in a fair light, we have to look at the quantitative easing aspect of both central banks.  Both central banks QE strategies are similar, with the US printing money until unemployment hits a target rate and the UK printing money until nominal GDP hits a target rate.  It could be argued that QE has been ineffective as it has had even weaker results in the UK than in the US, as Krugman's own chart points out, but I digress.

The bottom line is that there are several factors that contribute to a nation's growth and this is compunded even more when comparing two countries in two separate hemispheres.

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